Egypt's President Hosni Mubarak has asked parliament to change the constitution to allow multiple candidates in presidential polls.
Mubarak has been in power since 1981
The surprise announcement followed US and domestic pressure for reform in the Arab world's most populous nation.
Mr Mubarak said the move was aimed at bringing the law "in line with this stage of our nation's history".
The US state department welcomed what it described as a step towards a "more open political system".
"As a friend of the Egyptian government and people, we've urged Egypt to broaden the base of political participation," said state department spokesman Steven Pike.
There will be a referendum on the proposal before September's presidential poll.
Currently, Egypt holds presidential referendums on a single candidate approved by parliament.
Mr Mubarak's National Democratic Party has dominated the assembly since political parties were restored in the 1970s and he was expected to use the system to secure a fifth six-year term in September.
The US has been pressing for democratic reform in the Middle East, including in close allies such as Egypt and Saudi Arabia.
In Egypt, opposition and civil society activists have recently been calling for political reform.
Opposition activists welcomed the announcement, though some were sceptical about President Mubarak's motives.
The Muslim Brotherhood, the influential but outlawed Islamic organisation, said it would consider putting up a candidate.
An official in the opposition Al-Wafd party, Mohamed Ulwan, said it was a historic step.
"For the first time since the days of the pharaohs, the Egyptian people will choose their ruler," Reuters news agency quoted him as saying.
But others were more cautious.
"What the president proposed today is a just a crack in the wall... This step is not enough," said Abdel-Halim Qandil, editor of an opposition newspaper.
He said President Mubarak should not be allowed to stand again.
"This morning I have asked the parliament and the Shura Council to amend Article 76 of the constitution, which deals with the election of the president," Mr Mubarak said in his speech, carried live on state television.
He said he wanted "to give the opportunity to political parties to enter the presidential elections and provide guarantees that allow more than one candidate to be put forward to the presidency".
Protesters have taken to the streets to say "Enough" to Mubarak
Until Saturday's surprise announcement, Mr Mubarak had ruled out constitutional change.
The government and opposition parties had only a few days ago agreed to postpone discussing the constitution until next year.
A meeting in Cairo of G8 and Arab foreign ministers was recently cancelled because it was expected to raise sensitive issues about reforms in Egypt.
But the president will now be able to silence his critics, says the BBC's Heba Saleh in Cairo.
She says it is unlikely that any candidate from an opposition party will be able to win against Mr Mubarak in the short term.
A feminist author and doctor, Nawal Saadawi, announced last year that she would stand for election - but at the time there seemed no way her candidacy could go forward.
Hosni Mubarak is Egypt's longest-serving ruler since Muhammad Ali in the early 19th Century and one of the longest-serving leaders in the Arab world.
He succeeded President Anwar Sadat, who was assassinated in 1981, and was re-elected in 1987, 1993 and 1999.